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Saturday, 24 March 2012

Don't be fooled. It was bank borrowing that caused the debt crisis, not consumer borrowing.

So who was the "irrational" borrower that brought down the economy? And was the culprit actually "irrational"?


If you weren't sure why the banks got themselves, and everyone else, into such a pickle with the Credit Crisis, the 2012 Budget Document is the source of some nice nuggets of information. Civil servants, competent and on the whole moderately paid, have little incentive to avoid the truth and will often slip it in if they can.

The financial sector, having burned down the economy, tried to plant the box of used matches in the hands of the public. Ordinary Britons were fingered as a major cause of the crisis due to accepting a rush of cheap credit they couldn't afford. 


They glossed over the fact that the banks and building societies were the pushers of the cheap credit. And they also omitted to point out that actually it was overwhelmingly the banks - not the consumers nor the non-financial businesses - that went on a borrowing frenzy.

Why did the banks borrow so much? "Casino banking" is intended to be derogatory, but bankers probably don't realise they are supposed to feel insulted - as it couldn't be closer to the truth. Idiot sons for hundreds of years have been gambling away their family fortunes - relying on indulgent parents to bail them out. Cunning bankers have been gambling the nations money in the same way - knowing that indulgent politicians would bail them out using the taxpayer's money.


Here is how borrowing boosted bankers bonuses in the good times, and crushed the economy when their bets went wrong:

Idiot Son: I have £50. 
  • I bet it on a "six line" (odds 5:1) spin of a roulette wheel.
  • If I win. I pocket £300 (my original £50 plus 5 x £50). 
  • A 500% return on my original money! 
  • If I lose.
  • There goes my £50. Back to daddy for some more cash.

Cunning Banker: I have £50 million. I borrow another £250 million.
  • I bet it all on bonds, equities, derivatives (odds 5:1) not unlike the spin of a roulette wheel. 
  • If I win. I get £1,800 million (my original £50+£250 million,  plus 5 x £50 million plus 5 x £250 million)
  • I pay back the £250 million. I pocket £1,550 million.
  • A 3,100% return on my money!
  • If I lose. 
  • The taxpayer bails me out. The taxpayer loses his job, has his benefits cut, has his pension reduced and deferred, the nation is protected by an aircraft carrier with no aircraft.
*** MORE DATA FROM McKINSEY report "Debt and deleveraging: The global credit bubble and its economic consequences" added to this post in December 2012***
"The United Kingdom and Spain stand out for having the biggest increases in financial sector debt relative to GDP. These figures reflect the rapid growth of the financial sectors in those countries as well as a gradual shift by their banks away from relying on deposits to fund lending towards raising money by borrowing in the wholesale markets."


OUR RELATED STORIES:

In numbers (+ a cool animation): Global tax evasion and money laundering



17 comments:

  1. I like this! Very accurate too - just a shame this isn't on billboards across the country.

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  2. i agree with anonymous. it should be made into a tv ad or something! and forcibly shown to EVERYONE!!!

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    1. To the public domain, this should be a screensaver worldwide.

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  3. 1) Domestic savings are financial sector borrowings. The money that people put into their bank accounts, their company and private pensions, their ISAs and other savings products, and the money that companies keep in the bank to enable them to survive downturns, all of that shows in these charts as financial sector debt. If you want to show the level of financial sector debt that DOESN'T come from domestic savings & investments, you need to exclude those savings and investments.

    2) You've also ignored cross-border factors. The UK is not a closed economy. Our financial sector borrows and invests overseas as well.

    Ben Broadbent of the MPC argued recently that in the financial crisis UK banks took the greatest losses on their overseas obligations - but of the four UK banks that failed, only one (RBS) had significant overseas exposure. Therefore the bailouts themselves were primarily a domestic problem. Really they were due to exceptionally poor management by chief executives who knew little about the industry and had no real idea of the risks inherent in their business models. Apart from RBS, the largest overseas losses were incurred by Barclays and HSBC, which were not directly bailed out by the taxpayer, although these banks have of course benefited from the general guarantees extended to the banking sector, which reduces their cost of funding.

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    1. Wasn't the bank bailouts because of banks being unable to pay their debts? The run on Northern Rock was due to customers scared that bank would be unable to repay its depositors.

      Whether the banks used money from depositors or money the banks borrowed from other banks and institutions - they invested/gambled it in a way that taxpayers had to cough up to keep the banks solvent. The deposits/borrowings were liabilities, the 'investments' were assets. When the assets went down the tubes the banks needed rescuing.

      From the graph it looks like household debt doubled, and bank debt went up 5 or 6 times. I doubt much of that was savers depositing their money. Banks leveraged themselves borrowing money from other banks and institution secured on their 'assets', which went down the tubes (assets like subprime mortgages and the like).

      (Don't forget Barclays wasn't bailed out by the UK government. Barclays took money from Arab governments to avoid UK government interference).

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    2. Savings are tiny compared with financial sector borrowing.

      Cross border factors are important but the overall scale of the debt is the problem.

      The people who predicted the 2007/8 crisis all point to private sector debt ratios as being the primary factor that alerted them to the problem, though some like Vince Cable noticed the housing bubble as well. Anyone who failed to predict the crisis is irrelevant as they obviously don't understand the economy, and I don't recall Broadbent being amongst the few.

      The same people predict another crisis before the end of 2013, probably caused by the Euro collapsing.

      Even though you downplay the bailouts the scale of the banks we did bailout compared to GDP was enormous. About one year of national income wasn't it? And we've not benefited from owning these banks in the form of loans to the real economy.

      The finance sector are still operating under the same regulatory framework as 5 years ago. While banks have been using cheap government loans and reduced lending to deleverage, debt in the financial sector as a whole is still growing according to a more recent McKinsey report. The debt bubble is still growing despite the credit crunch and this can only end in tears.

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  4. I recently showed the same graph to my local (LD) MP. I pointed out that though private debt was huge, and 6x public debt there was no policy in the 2011 or 2012 budget reports aimed at private debt. I pointed out that with debt levels so high the risk of lending was massive and demand was low. Pointed out that paying down debt was going to take a long, long time, although bankruptcy which is growing will speed it up a little.

    He agreed but had no immediate answer. But what he has done is write to the Chancellor asking for an explanation. Suggest *everyone* go to their MP and show them this graph and ask for answers.

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  5. the money the banks lend in morgages and loans is only 10% real the rest is ficticious.... by thier own admission!!....therefore it could reasonably be argued that the loan or mortgage is only 10% real and the rest is ficticious.....so reduce all loans and mortgages by 90%....nationalise the bank of england, move all loans and mortgages over to the bank of england...at ....0.5%......sit back and watch our economy grow, while the bankers lose thier 90% but it is fictious anyway so all round win win situation.....err just dont spend your new found wealth on bombs, and shit ok?

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  6. I think it's too simplistic. Consumer credit was a problem because the debt burden on people soaked up their disposable income. Household debt (including mortgages admittedly) topped 100% of GDP and you can't say that this is not a problem, because it is a very big problem.

    Thus demand was weak in areas like retail. But who makes the stuff people sell? OK the Chinese, but still we haven't been spending enough to sustain growth - instead we've been insuring that banks have a good revenue stream.

    It's complex, and it needs to be presented as complex.

    BTW I showed that same graph to my MP (Julian Huppert, LibDem) who agreed that it looked like a major problem, but he had no answer. He said he'd write to the Chancellor about it, but I've never heard heard back and JH is too fascinated by other issues, and generally running around being busy to follow it up I suspect.

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  7. Whether or not the arguments about the scale of the debt is right or wrong the overall impact on the graphs will not vary a great deal. A few percent here a few percent there. The real problem has been what amounts to the privatisation of money creation. It used to be the preserve of the B of E whereas now banks create and print money. The cause stems from the 'creation' of derivatives and other dubious 'products'. The banking sector is clearly out of control and needs to be stopped. It will be messy but not calamitous.

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  8. There's a song in my head about a beautiful elf princess who wakes at the approach of a servant. In her darting sapphire eyes, shines the perfect image of creeping thieves. Prince Windsor covets her fairy gold, snuffing out the fairy princess's blighted life. A struggle to prevent the triumph by greed, ensues on egress from the hearths of Little Expectation. In every struggle to block the vile rich and hoist the flag of truth, in modern times, Truth has overcome and the vile rich start again to deceive us all.

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  9. What was all that rubbish about sub prime loans ?- It was a cover up for for the big debt backed private equity & Corporate buyouts -Why lots of big businesses are crashing.........plus standard casino banking. See X-ECONOMICS.

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  10. The banksters have proved once and for all that they are really organised crime syndicates. The problem for the tax payers is who to sort them out , as the politicians, law makers, and ruling classes are all in it together!

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  11. Here is the answer:
    http://www.youtube.com/watch?v=FzrBurlJUNk&feature=share

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  12. I 've been pointing this fact out for years, and all people ever say is well how can we change it? If we all band together and shout from the rooftops someone will listen, eventually... NO MORE APATHY.

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  13. Ben Dyson has been tackling some of the underlying issues - "When people go into debt it increases the total amount of money in the economy, because banks create money by making loans. When they pay off their debts it decreases the money supply, via the reverse process. A falling money supply usually triggers a severe recession (imagine draining all the oil out of your car engine and then seeing how well it runs). This means that we have an economy where, if we want to avoid a recession, it is essential that the public take on new debt at a faster rate than they pay off old debt. Is ever-increasing debt a sustainable basis for a healthy economy? "
    http://www.positivemoney.org/consequences/debt/

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  14. If this isn't on Facebook it should be. Every time I sign a petition the counter shows many more people are reached through Facebook.

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